In This Article:
This article is written for those who want to get better at using price to earnings ratios (P/E ratios). We’ll show how you can use Aspinwall and Company Limited’s (NSE:ASPINWALL) P/E ratio to inform your assessment of the investment opportunity. Aspinwall has a price to earnings ratio of 11, based on the last twelve months. That corresponds to an earnings yield of approximately 9.1%.
View our latest analysis for Aspinwall
How Do I Calculate A Price To Earnings Ratio?
The formula for P/E is:
Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)
Or for Aspinwall:
P/E of 11 = ₹181.7 ÷ ₹16.51 (Based on the year to March 2018.)
Is A High Price-to-Earnings Ratio Good?
A higher P/E ratio means that buyers have to pay a higher price for each ₹1 the company has earned over the last year. All else being equal, it’s better to pay a low price — but as Warren Buffett said, ‘It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.’
How Growth Rates Impact P/E Ratios
Probably the most important factor in determining what P/E a company trades on is the earnings growth. When earnings grow, the ‘E’ increases, over time. That means unless the share price increases, the P/E will reduce in a few years. A lower P/E should indicate the stock is cheap relative to others — and that may attract buyers.
Notably, Aspinwall grew EPS by a whopping 30% in the last year. And earnings per share have improved by 21% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio.
How Does Aspinwall’s P/E Ratio Compare To Its Peers?
The P/E ratio indicates whether the market has higher or lower expectations of a company. We can see in the image below that the average P/E (18.4) for companies in the food industry is higher than Aspinwall’s P/E.
Its relatively low P/E ratio indicates that Aspinwall shareholders think it will struggle to do as well as other companies in its industry classification. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.
Remember: P/E Ratios Don’t Consider The Balance Sheet
The ‘Price’ in P/E reflects the market capitalization of the company. In other words, it does not consider any debt or cash that the company may have on the balance sheet. Hypothetically, a company could reduce its future P/E ratio by spending its cash (or taking on debt) to achieve higher earnings.